In practice, you could have sovereigns conduct a ‘sovereign
debt swap’ whereby the ECB buys an agreed-upon portion of the
existing debt from the sovereigns and then uses these funds to back the supranational
debt. In future, the same agreed upon percentage of debt would
be issued at the supranational level. Clearly, you have to have
all euro zone members commit in equal measure or the benefits
would not accrue to the periphery.

I reckon a proposal of this sort would be controversial. One
should consider this a form of quantitative
easing. This is the sort of structure which could only be
set up over time – and may require amendments to existing
treaties. Moreover, it should be viewed as a move toward the
United States of Europe. I have said previously that the Germans would rather defect
than allow this. So it will not be considered a legitimate
political option until all other more superficial remedies have
failed.

The time for this idea has apparently arrived. Die Welt
provides more confirmation of what I have seen in two different
accounts, first in Austrian daily Der Standard and then on the
Spanish website Cinco Dias: Eurobonds are a potential solution.

Translation from German:

The Bundesbank no longer rules out emission of common European
bonds – so-called Eurobonds. Prerequisite, however, is closer
financial integration for the euro
countries. "This means joint control over the budgets of the
member countries, including intervention rights if individual
countries should violate the agreed rules," said Bundesbank
President Jens Weidmann to the "Berliner Zeitung".

Whether Eurobonds would be introduced, would be a political
decision. "You’d be well advised, however, to think about it
only at the end of an integration process," said the Bundesbank
chief.

In Brussels fear or hope is rife, depending on whom you ask,
Merkel’s people driving policy or those who accuse Germany of
blocking solutions. By the next European Council meeting, the
Summit of Heads of State and Government at the end of the first
week of December, the Chancellor could have negotiated a deal.
Whereby their agreement could involve Eurobonds or a stronger
commitment from the ECB in exchange for a promise from everyone
in Europe to put their economies on a more sustainable path.

Merkel increasingly isolated

What makes it no easier for Merkel: she is increasingly alone.
Yes, Sarkozy refrained from making a direct attack on ECB
monetary policy while in Strasbourg, but he stressed the
"different histories of both countries" in this question.

And the most loyal allies of Merkel are leaving the post. Dutch
Finance Minister Jan Kees de Jager,
also master of a healthy budget and a proud member of the club
of Triple-A countries, wanted, before a meeting with Finnish
Ministry colleague Jutta Urpilainen and German Finance Minister
Wolfgang Schaeuble on Friday, not to rule out a more "active
role" for the ECB.

"Where the ECB is concerned, our position is very close to the
German or nearly the same," he said. But: "In a crisis nothing
should be ruled out. In the end, something must happen." And
Urpilainen stated in a newspaper interview: a bigger role for
the ECB is still preferable to joint Eurobonds.

This article also speaks of German MPs in the European Parliament
in favour of greater ECB engagement as well as José Manuel
Barroso’s proposal for Eurobonds. Die Welt also writes that
Merkel will propose a European treaty change to allow high
deficit countries to be sued in the European Court of Justice.
The foreign minister from Luxembourg Jean Asselborn warns against
betting too much on treaty changes though. He believes that once
you open up the Pandora’s box of treaty change, other changes
would suddenly appear on the table as well – and the whole thing
would get quite messy, especially with referenda necessary in
both Ireland and France.

Only then back this up with ECB lender of last resort role or
Eurobonds

It looks like things are breaking toward monetisation and/or
Eurobonds. Expect to get one or the other after a fiscal
agreement by 9 December.

The rationale for this jury-rigged way of approaching the crisis
is to protect the existing principles laid out for Euroland which
call for an independent central bank and fiscal discipline. See
my underlining in the the relevant articles of the Lisbon Treaty for
the sovereign debt crisis. Moreover, if this policy path
holds, the ECB can say that it adhered to its principles despite
acting in a quasi-fiscal manner. And politicians can go back to
their voters and say they did so as well.